generic Canadian National Railway Co Stock Gives Every Indication Of Being Modestly Overvalued
- By GF Value
The stock of Canadian National Railway Co (NYSE:CNI, 30-year Financials) is estimated to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $117.76 per share and the market cap of $84 billion, Canadian National Railway Co stock gives every indication of being modestly overvalued. GF Value for Canadian National Railway Co is shown in the chart below.
Because Canadian National Railway Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4% over the past three years and is estimated to grow 3.01% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Canadian National Railway Co has a cash-to-debt ratio of 0.04, which is in the bottom 10% of the companies in Transportation industry. The overall financial strength of Canadian National Railway Co is 4 out of 10, which indicates that the financial strength of Canadian National Railway Co is poor. This is the debt and cash of Canadian National Railway Co over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Canadian National Railway Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $10.3 billion and earnings of $3.745 a share. Its operating margin is -23.67%, which ranks worse than 88% of the companies in Transportation industry. Overall, the profitability of Canadian National Railway Co is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Canadian National Railway Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Canadian National Railway Co is 4%, which ranks in the middle range of the companies in Transportation industry. The 3-year average EBITDA growth rate is 1.2%, which ranks in the middle range of the companies in Transportation industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Canadian National Railway Co's ROIC was -5.89, while its WACC came in at 4.57. The historical ROIC vs WACC comparison of Canadian National Railway Co is shown below:
In short, the stock of Canadian National Railway Co (NYSE:CNI, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Transportation industry. To learn more about Canadian National Railway Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
